Liquid Funds – a better alternative to Savings Bank account
Most of us generally have a good amount of money lying around in our various savings bank account earning just 4% per annum. This money may be a part of our salary waiting to be spent, maturity amounts of insurance policies or FDs, redemptions from investments or any other credits received from elsewhere. We may not have any immediate plans to spend, invest or reinvest this money. When the money becomes available, we take our own time to plan its further use while it keeps lying in the savings bank account earning a low return. Do you know that you can earn double the returns of a savings bank account while having almost the same level of safety, liquidity and ease of transaction?
Enter the Liquid Funds. They are a class of mutual funds which have no exposure to stocks and invest only in debt (fixed income) instruments generally with a residual maturity of less than 92 days. Investments are mostly in money market instruments, short-term corporate deposits and treasury. These funds provide good liquidity, low interest rate risk and the prevailing yield in the market. While liquidity is an important factor of these funds, safe investments make them the preferred parking option for HNIs and corporates. For all these reasons, liquid funds are a very good alternative to savings bank accounts and short-term fixed deposits. Since they have a low level of risk, they are assigned blue colour as per codes specified by the SEBI. Most schemes do not have a lock-in period and they all offer redemption proceeds within 24 hours directly into your bank account. All the mutual fund companies have liquid fund schemes and try to provide convenience of investing and redemption in line with the advancement of technology. We have liquid funds now which let you invest through sms, online banking, phone banking, call centre service and physical applications. The same is surprisingly true of redemptions also and that too with the highest level of security. Imagine you being able to move your money from your bank account to a liquid mutual fund through a sms or a call to the call centre, get double the returns of your bank account (current returns are approx 9% per annum), and still get it back in your bank account at 24 hour notice.
If it is all so easy and good, why are the liquid funds not popular amongst common investor while the HNIs and companies use them extensively? Simply lack of awareness. Most of the retail investors associate mutual funds with shares / stocks and banks occupy a much larger part of a retail investor’s consciousness than mutual funds as far as safe investing is concerned.
If you find liquid funds interesting, keep in mind some important points before investing in them. These funds are essentially shorter term investments. If you keep your money in them for too long, typically more than a year, probably you may be losing a better opportunity elsewhere – it may have been better to shift the money to a Short Term Fund. In fact, this can be another advantage of liquid funds – if you find that the money is likely to be lying around for a longer period than visualised initially, you can seamlessly shift full or a part of it to longer duration debt mutual funds or even equity funds without much fuss. Second issue is about taxation. For any part of investment redeemed from a liquid fund within a year, the gains are taxed as per the tax slab of the individual, like in a savings bank account. Beyond a year, the gains get the benefit of indexation as a long term gain. You can invest in the growth, dividend and dividend reinvestment options of a liquid fund. What option is good for you will depend on your investment horizon and the tax slab. Dividend paid by the liquid funds is tax-free in your hands as the fund is required to pay a Dividend Distribution Tax (DDT) of 28.325 percent (25%+10% surcharge+3% cess) on it directly. Liquid funds also score over bank deposits because they do not deduct tax at source (TDS).
Investors who tend to keep a sizeable balance in their savings bank accounts, and that too for prolonged periods, may turn to the option of liquid funds to enhance returns. It can make an appreciable difference to what you get to keep in the end.
Col (Retd) Sanjeev Govila
CFPCM, CEO, Hum Fauji Initiatives
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